Land Assembly Without Eminent Domain: Laboratory Experiments of Two Tax Mechanisms

Abstract

We use laboratory experiments to test the ability of two self-assessment tax mechanisms to discourage seller holdout and facilitate land assembly. Each mechanism requires a seller to declare a price at which he is willing to sell his property. The incentive to overstate the value is mitigated by using the declared price to assess a property tax. The incentive to understate the value is mitigated by allowing developers to buy the property at the declared price. One tax mechanism uses tax formula that is complex to calculate but incentive compatible to elicit sellers’ true reservation values. The second uses a flat tax rate that is easy to implement but not incentive compatible. We find that sellers overstate their reservation values under both tax mechanisms. Nevertheless, both mechanisms increase the rate of successful land assembly by 67% and the gains from trade by more than 120% relative to a control treatment. Given their equal performance, the flat tax rate seems the best option given the easy of its implementation.

Keywords: land assembly, eminent domain, property rights, tax regimes